Pandemics, Politics and the Economics of

Workers Compensation:

Robert P. Hartwig, PhD, CPCUClinical Associate Professor of Finance, Risk Management & Insurance

Darla Moore School of Business ¨ University of South CarolinaRobert.Hartwig@moore.sc.edu ¨ 803.777.6782

October 21, 2020

mailto:Robert.Hartwig@moore.sc.edu

Pandemics & P/C Insurance: Outline n P/C Insurers: Overcoming Uncertainty With Strength

w Financial Overview: The Industry’s Financial Position Amid the COVID-19 Pandemic

n The Economy, Investment Markets and COVID-19: Overview & Outlook

n Workers Compensation Performance & Exposure Overview

n Federal & State COVID-19 Initiatives Impacting Commercial Insurers

n Summary and Conclusions

n Q&A

3

P/C Insurance Industry: Financial Overview Amid the

COVID-19 PandemicThe P/C Insurance Industry Entered the COVID-19 Pandemic from a Position of

Financial Strength

Economic, Financial Market, Regulatory and Tort Risks Are Major

Challenges Going Forward3

4

Policyholder Surplus (Capacity), 2006:Q4–2020:H1

Sources: ISO, A.M .Best; Risk and Uncertainty Management Center, University of South Carolina.

($ Billions)

$487.1

$496.6

$512.8

$521.8

$478.5

$455.6

$437.1

$463.0 $490.8

$511.5 $540.7

$530.5

$544.8

$559.2

$559.1

$538.6

$550.3

$567.8

$583.5

$586.9

$607.7

$614.0

$624.4 $653.4

$671.6

$673.9

$675.2

$674.2

$673.7

$676.3

$700.9

$717.0 $750.7 $781.5

$742.1 $779.5

$802.2

$812.2 $847.8

$771.9 $819.7

$662.0

$570.7

$566.5

$505.0

$515.6

$517.9

$400$450$500$550$600$650$700$750$800$850$900

06:Q4

07:Q1

07:Q2

07:Q3

07:Q4

08:Q1

08:Q2

08:Q3

08:Q4

09:Q1

09:Q2

09:Q3

09:Q4

10:Q1

10:Q2

10:Q3

10:Q4

11:Q1

11:Q2

11:Q3

11:Q4

12:Q1

12:Q2

12:Q3

12:Q4

13:Q1

13:Q2

13:Q3

13:Q4

14:Q1

14:Q2

14:Q3

14:Q4

15:Q2

15:Q4

16:Q1

16:Q4

17:Q2

17:Q4

18:Q3

18:Q4

19:Q1

19:Q2

19:Q3

19:Q4

20:Q1

20:Q2

Financial Crisis

(-16.2%)

2010:Q1 data includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non-insurance business.

Drop due to near-record 2011 CAT losses

(-4.9%)

Policyholder Surplus is the industry’s financial cushion against large insured events, periods of economic stress and

financial market volatility. It is also a source of capital to underwrite new risks.

The P/C insurance industry entered the COVID-19 pandemic from a position strength and was

able to withstand the 9.0% surplus decline in Q1 2020

P/C Industry Net Income After Taxes, 1991–2020E*n 2005 ROE= 9.6%n 2006 ROE = 12.7%n 2007 ROE = 10.9%n 2008 ROE = 0.1%n 2009 ROE = 5.0%n 2010 ROE = 6.6%n 2011 ROAS1 = 3.5%n 2012 ROAS1 = 5.9%n 2013 ROAS1 = 10.2%n 2014 ROAS1 = 8.4%n 2015 ROAS = 8.4%n 2016 ROAS = 6.2%n 2017 ROAS =5.0%n 2018 ROAS = 8.0%n 2019: ROAS = 7.7%

*2020 estimate based on annualized actual 1H:20 figure of $25.0B. ROE figures are GAAP; 1Return on avg. surplus. Excludes Mortgage & Financial Guaranty insurers for years (2009-2014). Sources: A.M. Best, ISO.

$14,178

$5,840$19,316

$10,870 $20,598

$24,404 $36,819

$30,773

$21,865

$3,046

$30,029

$62,496

$3,043

$35,204

$19,456 $33,522

$63,784

$55,870

$56,826

$42,924

$36,813

$59,994

$50,000

$38,501

$20,559

$44,155

$65,777

-$6,970

$28,672

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 20E

COVID impacts will likely have a negative influence on Net Income in 2020, but too

soon to determine magnitude

$ Millions

ROE: Property/Casualty Insurance by Major Event, 1987–2020:H1* (est.)

6

*Excludes Mortgage & Financial Guarantee in 2008 – 2014. 2020:H1 estimate is based on actual Q1 2020 figure of 8.8%.

Sources: ISO, Fortune; USC RUM Center.

-5%

0%

5%

10%

15%

20%

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20*

P/C Profitability Is Influenced Both by

Cyclicality and Volatility

Hugo

Andrew, Iniki

Northridge

Lowest CAT Losses in 15 Years

Sept. 11

Katrina, Rita, Wilma

4 Hurricanes

Financial Crisis* ROE fell by 8.3 pts from 12.7% to 4.4%

(Percent)

Record Tornado Losses

Sandy

Low CATs

Harvey, Irma, Maria,

CA Wildfires

2019 7.7%

2020:H1 8.8%

Profitability & Politics

7

How Is Profitability Affected by the President’s Political Party?

-5%

0%

5%

10%

15%

20%

25%50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20

BLUE = Democratic President RED = Republican PresidentTr

uman

Nix

on/F

ord

Ken

nedy

/ Jo

hnso

n

Eise

nhow

er

Car

ter Reagan/Bush I Clinton Bush II

P/C insurance Industry ROE by Presidential Party Affiliation, 1950- 2020*

*2020 figure is for Q1 only. ROEs for the years 2008-2014 exclude mortgage and financial guaranty segments.Source: Risk and Uncertainty Management Center, University of South Carolina.

Obama

Trum

p

15.10%8.93%

8.65%8.35%8.33%

8.20%7.98%

7.68%6.98%6.97%6.90%

5.43%5.03%

4.83%4.68%

4.43%3.55%

16.43%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

CarterReagan II

NixonClinton I

G.H.W. BushG.W. Bush II

Obama IIClinton IIReagan I

Nixon/FordTruman

TrumpEisenhower IEisenhower II

G.W. Bush IObama I

JohnsonKennedy/Johnson

OVERALL RECORD: 1950-2019*

Democrats 8.1%Republicans 7.8%

Party of President has marginal bearing on profitability of P/C insurance industry

P/C Insurance Industry ROE by Presidential Administration, 1950-2019*

*Trump figure is 2017-2019 average. ROEs for the years 2008-2014 exclude mortgage and financial guaranty segments.Source: Risk and Uncertainty Management Center, University of South Carolina.

Net Premium Growth (All P/C Lines): Annual Change, 1971—2020:H1

-5%

0%

5%

10%

15%

20%

25%71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

(Percent)1975-78 1984-87 2000-03

*Pre-COVID-19 forecast from A.M. Best Review & Preview (Feb. 2020). NOTE: Shaded areas denote “hard market” periodsSources: A.M. Best (1971-2013, 2020F), ISO (2014-19); Risk & Uncertainty Management Center, Univ. of South Carolina .

Net Written Premiums Fell 0.7% in 2007 (First Decline

Since 1943) by 2.0% in 2008, and 4.2% in 2009, the First 3-Year Decline Since 1930-33.

2020F: 3.8%*2020:H1: 2.9%

2019: 3.6%2018: 10.8%2017: 4.6%2016: 2.7%2015: 3.5%2014: 4.2

2013: 4.4%2012: +4.2%

2020 OutlookPre-COVID: 3.8%Through H1: 2.9%

Potential Impacts of COVID-19 on Written Premium in 2020, by Key LineLine Estimated Premium ImpactWorkers Compensation 12.5% to 25% reduction in premium written in 2020

(equates to $5.9B to $11.75B DWP)Business Interruption & Contingency

7% to 13% reduction in premium volume (US & UK)

General Liability* $1.5B to $6.3B premium reduction in USPersonal Auto ~$10B in refunds, rebates

(equates to ~4% of DWP)Personal Travel Insurance 29% to 78% reduction in premium written (US & UK)Personal/Comm. Motor ~10% reduction in US; 0% to 11% reduction in UKMarine/Aviation/Transport $0.7B-$1.5B (US); $0.6 - $1.2B (UK)

11

*Includes nursing home professional liability.Source: Derived from Willis Towers Watson, Scenario Analysis of COVID-19 Pandemic (Fig.11, 14), May 2020. and other sources; Risk and Uncertainty Management Center, University of South Carolina.

Potential Impacts of COVID-19 on LOSSES in 2020, by Key LineLine Estimated Loss ImpactWorkers Compensation $0.2B - $92B (depends on severity of pandemic

and “presumption” determination)Business Interruption & Contingency

$2B - $22B (US); $1.1B - $13.9B (UK)

General Liability* $0.7B to $27B loss across US & Bermuda marketsPersonal/Comm. Motor $26B - $57B reduction in personal auto and $4.2B

- $9.4B commercial (US); $1 - $7B overall reduction in UK

Mortgage $0 - $1.7B loss across US & Bermuda marketsD&O $0.6 - $4.0 loss across US & Bermuda marketsMarine/Aviation/Transport $0.3B-$1.3B reduction (US); $0.6 - $1.1B (UK)

12

*Includes nursing home professional liability.Source: Derived from Willis Towers Watson, Scenario Analysis of COVID-19 Pandemic (Fig.11, 14), May 2020. and other sources; Risk and Uncertainty Management Center, University of South Carolina.

P/C Insurance Industry Combined Ratio, 2001–2020:H1*

*Excludes Mortgage & Financial Guaranty insurers 2008--2014.*First Half 2020.Sources: A.M. Best, ISO (2014-2019).

95.7

99.3101.1

106.5

102.5

96.4 97.097.8

100.799.298.9

103.7

99.2101.0

92.6

100.898.4

100.1

107.5

115.8

90

100

110

120

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20**

As Recently as 2001, Insurers Paid Out

Nearly $1.16 for Every $1 in Earned Premiums Relatively

Low CAT Losses, Reserve Releases

Heavy Use of Reinsurance Lowered Net

Losses

Relatively Low CAT Losses, Reserve Releases

Higher CAT

Losses, Shrinking Reserve

Releases, Toll of Soft

Market

Sandy Impacts

Lower CAT

Losses

Best Combined Ratio Since 1949 (87.6)

Avg. CAT Losses,

More Reserve Releases

Cyclical Deterioration

Sharply higher CATs are driving

large underwriting losses and

pricing pressure

Pre-COVID 2020 Combined Ratio Est.

99.1 (A.M. Best)

COVID-19 has had no

discernable net impact on

pre-COVID expectations for under the

combined ratio though

Q2 2020

COVID-19 Announced Losses vs. Top-Down Industry Estimates (as of May 12, 2020)

*Lloyd’s CEO John Neil appearance on CNBC, May 14, 2020: https://www.cnbc.com/2020/05/14/lloyds-of-london-coronavirus-will-be-largest-loss-on-record-for-insurers.htmlSources: Company disclosures, Dowling & Partners, Barclays Research, Autonomous Research, BofA Global Research, UBS Securities, Willis Towers Watson from Artemis.bm accessed at https://www.artemis.bm/news/consensus-emerging-on-30bn-to-100bn-covid-19-industry-loss-willis-re/; Risk and Uncertainty Management Center, University of South Carolina.

Global P/C COVID-19 loss consensus $30B - $100B

(~$60B as midpoint)

UBS

30-60bn

Q1 reported COVID claims totaled $4.2B according to Willis, but Q2 will be a truer

reflection of actual loss

Lloyd’s: Says its own p/c claims could reach $4.3B by June 30. Estimates global p/c losses at $107B; Global investment losses = $96B*

https://www.cnbc.com/2020/05/14/lloyds-of-london-coronavirus-will-be-largest-loss-on-record-for-insurers.htmlhttps://www.artemis.bm/news/consensus-emerging-on-30bn-to-100bn-covid-19-industry-loss-willis-re/

Potential Impact of COVID-19 on Insured Losses by Line

Source: Willis Towers Watson, Scenario Analysis of COVID-19 Pandemic (Fig.10), May 2020; Risk and Uncertainty Management Center, University of South Carolina.

Loss impacts of COVID-19 on the WC line are potentially severe but

depend not only on the course of the disease but state decisions on

presumption

Business Interruption losses

are potentially material even under

the moderate severity scenario

Viral Outbreaks Are Not An Insurable Risk

16*Sources: APCIA using published reports, including IMF, World Bank, Learnbonds.com; APCIA adjustment to 2020 USD

For Reference

2005 Katrina$58 Billion

2001 9/11$48 Billion

(insured losses)

Pandemics are frequent, severe, and widespread

(7 pandemics with multi-

billion$ economic

losses in just the last 18

years)

Economic Losses from Pandemics

Estimated Monthly U.S. Business Interruption Coronavirus Losses for Small Business—Potential Range (

June Paper on Insurability of Pandemic Risk

n Large scale business continuity risks from pandemics are generally note insurable in the private sector

n Business continuity risks are largely undiversifiable within private insurance markets and are highly correlated with other risks (e.g., investment risks)

n Large scale business continuity losses pose a potentially systemic risk to the industry and overall economy

n Import role for government Download at: https://www.uscriskcenter.com/wp-content/uploads/2020/05/Uninsurability-of-Pandemic-Risk-White-Paper-Hartwig-APCIA-FINAL-WORD.pdf

https://www.uscriskcenter.com/wp-content/uploads/2020/05/Uninsurability-of-Pandemic-Risk-White-Paper-Hartwig-APCIA-FINAL-WORD.pdf

INVESTMENTS: THE NEW REALITY

Investment Performance Is a Key Driver of Insurer Profitability

Aggressive Rate Cuts Will Adversely Impact Invest Earnings

Financial Crisis Déjà Vu?

Property/Casualty Insurance Industry Investment Income: 2000–2020E

$38.9$37.1$36.7

$38.7

$54.6

$51.2

$47.1$47.6$49.2$48.0$47.3$46.4$47.2$46.6

$48.9

$59.6$61.4

$52.8

$39.6

$49.5$52.3

$30

$40

$50

$60

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18* 19 20

Due to persistently low interest rates, investment income remained below pre-crisis levels for a decade. Lower interest rates post-COVID will drive investment income down once again.

*2020 figure is annualized based on H1 actual of $26.4B. 2018-19 figures are distorted by provisions of the TCJA of 2017. Increase reflects such items as dividends from foreign subsidiaries.

1 Investment gains consist primarily of interest and stock dividends. Sources: ISO; University of South Carolina, Center for Risk and Uncertainty Management.

($ Billions)

Investment income had just recovered from a decade-long slump. Aggressive Fed

actions and recession are pushing interest rates lower and will adversely impact investment income for years to come.

Net Investment Yield on Property/Casualty Insurance Invested Assets, 2007–2020F*

4.4

4.0

4.6 4.5

3.7 3.8 3.73.4

3.7

3.2 3.1 3.13.4

3.1 3.0

4.6

4.23.9

2.5

3.0

3.5

4.0

4.5

5.0

03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20F

The yield on invested assets remains low relative to pre-crisis yields. Fed rate increases beginning in late 2015 through 2018 halted the slide in yields, but rate cuts in

2019/2020 will preclude future gainsSources: NAIC data, sourced from S&P Global Market Intelligence; 2017-19 figures are from ISO. 2020F is from the Risk and Uncertainty Management Center, Univ. of South Carolina.

(Percent) Investment yields remained depressed--down about 150 BP from pre-crisis

levels. COVID-19 Fed rate cuts, bond purchases will push asset yield down

Average: 1960-2019 = 4.9%Low: 2.8% (1961)

High: 8.2% (1984/85)

US Treasury Security Yields:A Long Downward Trend, 1990–2020*

*Monthly, constant maturity, nominal rates, through Sept. 2020. Sept. 2020 figure is as of 9/13/20.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Risk and Uncertainty Management Center, University of South Carolina.

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

'90'91'92'93'94'95'96'97'98'99'00'01'02'03'04'05'06'07'08'09'10'11'12'13'14'15'16'17'18'19'20

Recession2-Yr Yield10-Yr Yield

Yields on 10-Year US Treasury Notes have been essentially

below 5% for more than a decade

Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for many years to come.

Fed emergency rate cuts and QE in response to the COVID-19 pandemic and

market volatility have pushed rates to their levels

below those in the financial crisis

10-YR. TREASURYJan. 2020: 1.76%

Sept. 2020: 0.69%*

http://www.federalreserve.gov/releases/h15/data.htm

THE ECONOMY

COVID-19 Pandemic Will Directly and Severely Impact Growth As Exposure Growth Rapidly Shrinks

The Strength of the Economy Has Always Influenced Growth in Insurers’ Exposure Base Across Most Lines

The Links Between the Economy and the P/C Insurance Industry Are Strengthening

US Real GDP Growth*

* Estimates/Forecasts from Wells Fargo Securities.Source: US Department of Commerce, Wells Fargo Securities 10/20; Center for Risk and Uncertainty Management, University of South Carolina.

2.7%

1.8%

-1.3%

-2.8%

2.5%

2.2% 2.7% 4.5%

0.8% 1.4% 3.5%

2.1%

1.2% 3.1% 3.2%

2.9%

2.5% 3.5%

2.9%

1.1% 3.1%

2.0%

2.1%

-5.0%

28.6%

6.1%

5.2%

3.9%

2.9%

2.3%

-31.4%

3.1%3.6%

2.5%

1.8%

1.1%4.1%

1.8% 2.1%

1.6%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

2008

2009

2010

2011

2012

2013

2014

2015

16:1

Q16

:2Q

16:3

Q16

:4Q

17:1

Q17

:2Q

17:3

Q17

:4Q

18:1

Q18

:2Q

18:3

Q18

:4Q

19:1

Q19

:2Q

19:3

Q19

:4Q

20:1

Q20

:2Q

20:3

Q20

:4Q

21:1

Q21

:2Q

21:3

Q21

:4Q

Demand for Insurance Will Be Severely Impacted As the Economy Slows but Is Expected to Improve by Late Q3 and into Q4

Real GDP Growth (%)

“Great Recession”

began in Dec. 2007

Financial Crisis

Economic recovery from COVID is strong, but

economic losses likely not recovered before late 2021.

COVID CRASHQ2 2020

plunged by 31.4%

The Economy Drives P/C Insurance Industry Premiums:2006:Q1–2020:Q2*

Direct Premium Growth (All P/C Lines) vs. Nominal GDP: Quarterly Y-o-Y Pct. Change

Sources: SNL Financial; U.S. Commerce Dept., Bureau of Economic Analysis; ISO; I.I.I.; Risk and Uncertainty Management Center, University of South Carolina.

-6%

-4%

-2%

0%

2%

4%

6%

8%

2008:Q1

2008:Q3

2009:Q1

2009:Q3

2010:Q1

2010:Q3

2011:Q1

2011:Q3

2012:Q1

2012:Q3

2013:Q1

2013:Q3

2014:Q1

2014:Q3

2015:Q1

2015:Q3

2016:Q1

2016:Q3

2017:Q1

2017:Q3

2018:Q1

2018:Q3

2019:Q1

2019:Q3

2020:Q1

DWP y-o-y change y-o-y nominal GDP growth

Negative GDP growth in the first half of 2020, will cause DWP to decelerate sharply but with a lag and likely turn

negative in some lines. Rebates, discounts and rate decreases will amplify the deceleration.

Direct written premiums track nominal GDP fairly tightly over time, suggesting the P/C insurance industry’s growth prospects inextricably linked to economic performance.

Unemployment Rate: Jan. 2019 – Sept. 2020

Source: US Bureau of Labor Statistics; Risk and Uncertainty Management Center, University of South Carolina.

Unemployment Rate

3.7%3.7%3.5%3.6%3.5%3.5%3.6%3.5%4.4%

14.7%13.3%

11.1%10.2%

8.4%7.9%

3.7%3.6%3.6%3.8%3.8%4.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

Jan-19

Feb-19

Mar-19

Apr-19

May-19

Jun-19

Jul-19

Aug-19

Sep-19

Oct-19

Nov-19

Dec-19

Jan-20

Feb-20

Mar-20

Apr-20

May-20

Jun-20

Jul-20

Aug-20

Sep-20

COVID-19 shutdowns pushed the unemployment rate up to a shocking 14.7% in April before

improving beginning in May

11.4M jobs were created from May through Sept. (after a loss of 22.2M in March/April)

helping bring down the unemployment rate to 7.9% from its April peak of 14.7%. So far,

~50% of jobs lost have been recovered.

South Carolina:Feb. 2020: 2.5%

Peak: 12.8% (Apr.)Aug. 2020: 6.3%

US Unemployment Rate Forecast: 2007:Q1–2021:Q4

4.5%

4.5%

4.6% 4.8%

4.9% 5.4%6.1%6.9%

8.1%

9.3% 9.6% 10.0%

9.7%

9.6%

9.6%

8.9% 9.1%

9.1%

8.7%

8.3%

8.2%

8.0%

7.8%

7.7%

7.6%

7.3%

7.0%

6.6%

6.2%

6.1%

5.7%

5.6%

5.4%

5.2%

5.0%

4.9%

4.9%

4.9%

4.7%

4.7%

4.4%

4.3%

4.1%

4.1%

3.9%

3.8%

3.8%

3.9%

3.6%

3.6%

3.5% 3.8%

13.0%

8.8%

7.6%

7.1%

6.8%

6.3%

5.9%

9.6%

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%07:Q1

07:Q2

07:Q3

07:Q4

08:Q1

08:Q2

08:Q3

08:Q4

09:Q1

09:Q2

09:Q3

09:Q4

10:Q1

10:Q2

10:Q3

10:Q4

11:Q1

11:Q2

11:Q3

11:Q4

12:Q1

12:Q2

12:Q3

12:Q4

13:Q1

13:Q2

13:Q3

13:Q4

14:Q1

14:Q2

14:Q3

14:Q4

15:Q1

15:Q2

15:Q3

15:Q4

16:Q1

16:Q2

16:Q3

16:Q4

17:Q1

17:Q2

17:Q3

17:Q4

18:Q1

18:Q2

18:Q3

18:Q4

19:Q1

19:Q2

19:Q3

19:Q4

20:Q1

20:Q2

20:Q3

20:Q4

21:Q1

21:Q2

21:Q3

21:Q4

Great RecessionRising unemployment eroded payrolls and

WC’s exposure base.Unemployment peaked at 10% in late 2009.

= actual; = forecastsSources: US Bureau of Labor Statistics; Wells Fargo Securities (10/20 edition); Risk and Uncertainty Management Center, University of South Carolina.

The unemployment rate peaked at 14.7% in April

(13.0% Q2 avg.)

At 3.5%, the unemployment rate in Feb. 2020 WASat its lowest point

in 50 years.

Government Mandated Business Closures Were the Real Black Swan, Not the Coronavirus

Sources: CDC; Risk and Uncertainty Management Center, University of South Carolina

• The US (and world) has endured several other major infectious disease outbreaks killing 100,000+ Americans without shutting down the economy• Hong Kong Flu (1968-70)• Asian Flu (1957-58)

• It is the reaction to the virus that is unprecedented and represents the true Black Swan event

• The ramifications of this decision will be consequential for a generation (e.g., $3 trill. in debt)

ADDITIONAL LABOR MARKET IMPACTS

Key Factors Driving Workers Compensation Exposure

30

Nonfarm Payroll (Wages and Salaries):Quarterly, 2005–2020:Q2

Note: Recession indicated by gray shaded column. Data are seasonally adjusted annual rates.Sources: http://research.stlouisfed.org/fred2/series/WASCUR; National Bureau of Economic Research (recession dates).

Billions

$5,500$5,750$6,000$6,250$6,500$6,750$7,000$7,250$7,500$7,750$8,000$8,250$8,500$8,750$9,000$9,250$9,500$9,750

05:Q1

05:Q2

05:Q3

05:Q4

06:Q1

06:Q2

06:Q3

06:Q4

07:Q1

07:Q2

07:Q3

07:Q4

08:Q1

08:Q2

08:Q3

08:Q4

09:Q1

09:Q2

09:Q3

09:Q4

10:Q1

10:Q2

10:Q3

10:Q4

11:Q1

11:Q2

11:Q3

11:Q4

12:Q1

12:Q2

12:Q3

12:Q4

13:Q1

13:Q2

13:Q3

13:Q4

14:Q1

14:Q2

14:Q3

14:Q4

15:Q1

15:Q2

15:Q3

15:Q4

16:Q1

16:Q2

16:Q3

16:Q4

17:Q1

17:Q2

17:Q3

17:Q4

18:Q1

18:Q2

18:Q3

18:Q4

19:Q1

19:Q2

19:Q3

19:Q4

20:Q1

20:Q2

Prior Peak was 2008:Q3

at $6.54 trillion

Financial crisis trough (2009:Q1) was $6.23 trillion, down 5.3% from

prior peak Growth rates 2019: 4.9% 2018: 4.6% 2017: 4.5%2016: 3.4%2015: 3.2%2014: 4.9% 2013: 5.2%2012: 2.3% 2011: 3.9% 2010: 5.5%

30

Latest (2020:Q2) was $8.84 trillion—a $682 billion (7.2%) plunge

from its Q1 pre-COVID peak

http://research.stlouisfed.org/fred2/series/WASCUR

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20*$25

$30

$35

$40

$45

$50Wage & Salary DisbursementsWC NPW

31

Payroll Base* WC NWP

Payroll vs. Workers Comp Net Written Premiums, 1990-2020*

*Private employment as of Aug. 2020; Shaded areas indicate recessions. WC premiums are from NCCI through 2018.Sources: NBER (recessions); Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR.

Continued payroll growth will benefit WC exposure growth, but falling rates will adversely impact growth in Net Written Premiums

7/90-3/91 3/01-11/01 12/07-6/09

$Billions $Billions

WC premium volume dropped two

years before the recession began

WC net premiums written were down $14B or 29.3%

to $33.8B in 2010 after peaking at $47.8B in 2005

Recent divergence in

NWP and payroll exposure is the

result of WC rate decreases.

Payrolls and WC NWP will both

post sharp declines in 2020

Payrolls in 2020 YTD show zero growth vs.

+4.7% ($415.1B) in

2019 vs. 2018

http://research.stlouisfed.org/fred2/series/WASCUR

Average Weekly Hours of All Private Workers, March 2006—Sept. 2020*

*Seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics at http://www.bls.gov/data/#employment; National Bureau of Economic Research (recession dates); Center for Risk and Uncertainty Management, University of South Carolina.

33.533.633.733.833.934.034.134.234.334.434.534.634.734.8

'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20

Hours worked bottomed out at 34.1 per week in March 2020, but have

since recovered stronger than expected

Hours worked plunged

during the recession, impacting

payroll exposures

(Hours Worked)

http://www.bls.gov/data/

Average Hourly Wage of All Private Workers, March 2006—Sept. 2020*

*Seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics at http://www.bls.gov/data/#employment; National Bureau of Economic Research (recession dates);

$15

$17

$19

$21

$23

$25

$27

$29

$31

'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20

The average hourly wage was $29.47 in March 2020,

up 3.3% from $28.52 in February, before COVID-19

lockdowns

Wage gains continued during the

recession, despite massive job losses

(Hourly Wage)

Ironically, COVID-19 has actually driven up the average hourly wage up because the

majority of early jobs losses were and remain in the low wage service sector

Sept. 2020$29.47

Dec. 2007$21.22

http://www.bls.gov/data/

Annual Change in Average Hourly Wage, 2007–2020*

3.0% 3.1% 2.8%

1.9% 2.1%2.3%

2.6% 2.5%3.0% 3.1%

4.7%

2.1%1.9%2.0%

0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%5.0%

07 08 09 10 11 12 13 14 15 16 17 18 19 20*

Acceleration of wage growth in 2020 reflects disproportionate loss of low

wage jobs and continued gains among higher-wage earners

*2020 figure year-over-year increase for Sept. 2020 vs Sept. 2019.Sources: US Bureau of Labor Statistics at http://www.bls.gov/data/#employment; National Bureau of Economic Research (recession dates); Risk and Uncertainty Management Center, Univ. of South Carolina.

Wage growth acceleration obscures the massive loss

in payroll exposures

Wage growth fell sharply during the Great Recession

http://www.bls.gov/data/

35

Notes: Recessions indicated by gray shaded columns. Data are not seasonally adjusted.Sources: Bureau of Labor Statistics http://www.bls.gov/news.release/empsit.a.htm ; NBER (recession dates); Center for Risk and Uncertainty Management, University of South Carolina.

0100200300400500600700800900

1,0001,1001,2001,3001,400

'94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20

Diminishing federal aid for worker could increase the number of discouraged workers as they conclude no positions are available

There were 581,000 discouraged workers in Sept. 2020, down 15% from the COVID

peak in July of 681,000, but up 101%

from the Dec. 2019 trough of 289,000

Thousands

“Discouraged Workers” are people who have searched for work for so long in vain

that they actually stop searching and drop out of

the labor force

Number of “Discouraged Workers,”: Jan. 1994—Sept. 2020

More than 1.3 million people exited the labor force during

the Great Recession and were slow to return

http://www.bls.gov/news.release/empsit.a.htm

Labor Force Participation Rate,Jan. 2002—Sept. 2020*

*Defined as the percentage of working age persons in the population who are employed or actively seeking work.Note: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics at http://www.bls.gov/data/; National Bureau of Economic Research (recession dates); Center for Risk and Uncertainty Management, University of South Carolina.

60

61

62

63

64

65

66

67

68

'02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20

Large numbers of people exited during

the recession—a trend that continued for years afterward

Even pre-COVID, labor force participation rates were

stubbornly low—far below pre-Great Recession levels

and one of the country’s most vexing labor market

problems. COVID-19 layoffs have intensified this problem

Labor Force Participation as a % of Population

April 2020 rate fell to 60.2%, its

lowest level since 1971

Sept. 202061.4%

http://www.bls.gov/data/

You’re (NOT) Hired!Number of Hires, Jan. 2003—Aug. 2020*

2,000

3,000

4,000

5,000

6,000

7,000

8,000

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20

Hirings plunged to 3.6 million

during the recession, down

30%, from 5.5 mill in 2006

COVID-19 caused a catastrophic 31.7% plunge in hiring, resulting in 1.9 million fewer hires in April 2020 compared to January. Hiring has bounced back, but only about half

of the 22M jobs lost in March and April have been regained

(000)

-30%

*Seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics JOLTS survey: at http://www.bls.gov/jlt/; National Bureau of Economic Research (recession dates); Center for Risk and Uncertainty Management, University of South Carolina.

-32%+63%

http://www.bls.gov/jlt/

Number of Unemployed Persons per Job Opening, Feb. 2003—Aug. 2020* (Most Recent Available)

*Seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics JOLTS survey: at http://www.bls.gov/jlt/; National Bureau of Economic Research (recession dates); Center for Risk and Uncertainty Management, University of South Carolina.

0

1

2

3

4

5

6

7

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20

At the height of the Great

Recession, there were nearly 7 job seekers for every

one opening

In Feb. 2020, there were just 0.8 job seekers for every one opening. By

April there 4.6 jobs seekers per available

position.

Unemployed Persons per Job Opening

Aug. 2020 = 2.1

http://www.bls.gov/jlt/

39

Commercial Lines Growth, Underwriting Performance

& Pricing Cyclicality

Pricing Pressures Are Intensifying

39

CIAB: Average Commercial Rate Change, All Lines, 2011:Q1–2020:Q2*

-0.1% 0.9% 2.7% 4.4%

4.3%

3.9% 5.0%

5.2%

4.3%

3.4%

2.1%

1.5%

-0.5%

0.1%

-0.7%

-2.3%

-3.3%

-3.1%

-2.8%

-3.7%

-3.9% -3.2%

-3.3% -2.5%

-2.8% -1.3%

0.3% 1.7% 2.4% 3.5% 5.2% 6.2% 7.5% 9.3% 10.8%

-2.9%

1.6%

1.5%

-16%

-11%

-6%

-1%

4%

9%

14%

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17

4Q17

1Q18

2Q18

3Q18

4Q18

1Q19

2Q19

3Q19

4Q19

1Q20

2Q20

*Latest available.Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.Source: Council of Insurance Agents & Brokers; Center for Risk and Uncertainty Management, Univ. of South Carolina.

Largest increase since 2003 for some accounts

(Percent)

Renewals turned positive in late 2011

in the wake of record tornado

losses and Hurricane Sandy

High CAT losses and poor underwriting results in recent years combined with COVID pressures, reduced capacity,

lower interest rates and increased uncertainty are exerting significant pressure on markets with overall

rates up by +9.3% as of Q1 2020

Change in Commercial Rate Renewals, by Line: 2020:Q2

Source: Council of Insurance Agents and Brokers; USC Center for Risk and Uncertainty Management.

Percentage Change (%)

3.5%6.5% 6.8% 6.8%

9.4% 9.6% 9.7%

13.3%

16.8%20.0%

0.7% 1.4% 1.6%2.3% 3.1% 3.4%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Wor

kers

Com

p

Terro

ris,

Sur

ety

Bro

ker E

&O

Floo

d

Mar

ine

Bro

ker E

&O

Cyb

er

Gen

eral

Liab

ility

Con

stru

ctio

n

EP

L

Com

mer

cial

Aut

o

Bus

ines

sIn

terru

ptio

n

Com

mer

cial

Pro

perty D&

O

Um

brel

la

All major commercial lines experienced

increases in Q2 2020

Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.

Umbrella now leads all major commercial lines in terms of rate gains,

exceeding D&O and CP

42

Workers Compensation Performance Overview

COVID-19 Will Radically Change the WC Line’s Financials in 2020

42

Workers Compensation Combined Ratio: 1994–2019P

102.0

97.0 100.0

101.0

112.6

108.6

105.1

102.7

98.5 103.5

104.5 110.6 115.0

115.0

109.0

102.0

100.0

94.0

94.0

89.0

83.2 85.0

121.7

107.0115.3

118.2

80859095100105110115120125130

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19p

Workers Comp Is an Example of a Line that Was Recently Restored to Health Through the Return of Rate Adequacy as

Well as Declining Claim FrequencySources: A.M. Best (1994-2009); NCCI (2010-2019P) and are for private carriers only.. 43

WC results have improved markedly since

2011. The 2018/2019 combined ratios were the best in at least 80 years

WC Net Combined Ratio: Calendar vs. Accident Year

* AY data reported as of 12/31/19.2020. Includes policyholder dividends.Source: NCCI from NAIC Annual Statement data; USC Center for Risk and Uncertainty Management.

Combined Ratio

95

99

8385

75

80

85

90

95

100

105

2018 2019p

Calendar Year Accident Year

WC AY results suggest CY figures

benefit from material ongoing reserve

releases

Workers Compensation Premium: Down in 2017 After 6 Years of IncreaseNet Written Premium

31.0

31.3

29.8

30.5

29.1

26.3

25.2

24.2

23.3

22.3 25.0

26.1 29.2 31.1 34.7 37.8

38.6

37.6

33.8

30.3

29.9 32.3 35.1 36.9 38.5

39.7

40.1

39.8 43.3

42.0

35.3

35.7

34.3 35.4

33.6

30.1

28.5

26.9

25.9

25.0 2

8.6 3

2.1

37.7

42.3

46.5

47.8

46.5

44.3

39.3

34.6

33.8 3

6.4 39

.5 41.8 44

.2 45.5

45.6

45.0 48.6

47.0

0

10

20

30

40

50

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19p

State Funds ($ B)Private Carriers ($ B)

Pvt. Carrier NWP growth was -3.0% in 2019 vs. -5.7% for state funds

$ Billions

Calendar Yearp Preliminary

Source: NCCI from Annual Statement Data.Includes state insurance fund data for the following states: AZ, CA, CO, HI, ID, KY, LA, MD, MO, MT, NM, OK, OR, RI, TX, UT.Each calendar year total for State Funds includes all funds operating as a state fund that year.

WC Direct Written Premium, 2019Private Carriers

46

Source: NCCI from 2018 and 2019 NAIC Annual Statement Statutory Page 14.; Risk and Uncertainty Management Center, University of South Carolina.

Overall Change-2.6%

WC Direct Written Premium Change by Component: 2018 vs. 2019

47Source: DWP Change: NAIC Annual Statement Statutory Page 14 for all NCCI states. Components: NCCI Policy data.; USC Center for Risk and Uncertainty Management.

Percentage Change

5.5%

-9.3%

-0.1%

3.3%

-1.3%

-12.0%-10.0%

-8.0%-6.0%-4.0%-2.0%0.0%2.0%4.0%6.0%8.0%

Payroll Loss Cost andMix

CarrierDiscounting

Other Factors Change inDWP

Payroll will drive the vast

majority of premium loss

in 2020, partially offset by

small loss cost impacts

Workers Compensation Lost-Time Claim Frequency Declined Again in 2019

48

0.3

-6.5

-4.5

0.5

-3.9-2.3

-4.5

-6.9

-4.5 -4.1-3.7

-6.6

-4.5

-2.2

-4.3 -4.9

10.6

-3.9

-5.8

-4.0-3

-5.1-6.2

-4.8

-1.4

-4.0

3.6

-0.9

-10-8-6-4-202468

1012

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

IndicatedAdjusted*

Percent

Accident Year*Adjustments primarily due to significant audit activity.2019p: Preliminary based on data valued as of 12/31/2019.Source: NCCI Financial Call data, developed to ultimate and adjusted to current wage an voluntary loss cost level; Excludes high deductible policies; 1994-2018: Based on data through 12/31/18. Data for all states where NCCI provides ratemaking services; Excludes WV prior to 2012, TX prior to 2007 and NV prior to 2002.Frequency is the number of lost-time claims per $1M pure premium at current wage and voluntary loss cost level

Average Annual Change = –3.6%(1994–2019p)

$9.8$9.5$9.2$9.7$9.7$10.3$11.5$12.5$13.6$14.9$16.4$16.9$17.5

$22.1$22.2

$21.8$21.6

$22.6$22.8$22.9$23.9$24.3$25.3$22.3$18.1

$17.6

$19.1$20.8

$21.6

-0.9%

-2.7%

+0.5%

+8.3%

+0.9%

+5.5%

+2.8%

+0.6%

+3.6%

+3.0%

+10.1%

+9.6%

+8.8%

+8.7%

+11.7%

+5.9%

+1.7%

+4.9%

-2.8%

-3.1%

+1.0%

+6.8%

5

7

9

11

13

15

17

19

21

23

25

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19p

IndemnityClaim Cost ($ 000s)

Accident Year

Workers Comp Indemnity Claim Costs: Sharper Increase in 2019

Average indemnity costs per claim were up 4% in

2019 to $25,300

Average Indemnity Cost per Lost-Time Claim

+3.0

%

+4.4

%

Cumulative Change = 158% (1991-2019p)

2019p: Preliminary based on data valued as of 12/31/2019.1991-2018: Based on data through 12/31/2018, developed to ultimateBased on the states where NCCI provides ratemaking services including state funds, excluding WV; Excludes high deductible policies.

+0.4

%

+1.3

%

+3.2

% +3.

4%

+4.0

%

$8.1$8.2$8.1$8.8$8.9$9.6$10.9$11.8$13.0$13.9$15.7$17.0$18.3

$24.2$25.2

$25.8$26.0

$27.4$27.2$27.6$28.7$28.6$29.5

$26.5

$20.5$19.2

$21.7$22.9

$25.2

0.04

0.04

+3.7

+1.9

+0.8%

-0.2%

+4.2%

+5.6% +2.4%

+5.5%

+7.0%

+4.7%

+8.1%

+7.9%

+13.6%

+6.7%

+10.2%

+8.3%

+10.1%

+7.4%

+5.1%

+9.0%

+2.1%

+1.3%

+6.8%

+5.8%

0

5

10

15

20

25

30

35

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19p

MedicalClaim Cost ($ 000s)

Accident Year

Workers Comp Medical Claim Costs: Pace of Increase Decelerated in 2019

Average indemnity costs per claim were up 3.0% in 2019 to $29.500, following a modest

2.5% increase in 2018

Average Medical Cost per Lost-Time Claim

+2.5

%

+4.0

%

Cumulative Change = 264%(1991-2019p)

2019p: Preliminary based on data valued as of 12/31/2019.1991-2018: Based on data through 12/31/2018, developed to ultimateBased on the states where NCCI provides ratemaking services including state funds, excluding WV; Excludes high deductible policies.

-1.0

%

+1.5

% +3.0

%

51

Federal and State COVID-19 Initiatives Impacting Commercial Insurers

P/C Insurance Coverage & COVID-19

n Insurers have received tens of thousands of claims related to COVID-19 lossesw Workers comp Event Cancellation Trade Credit

w Business Interruption Travel Insurance Mortgage

w GL D&O EPL

n Crises tend to precipitate efforts to stretch contract language in an effort to:w Find coverage where none existsw Find coverage where none was intended

w Find coverage for which no premium was paid

n Politicians frequently pile on: Zero political risk

Update on Business Continuity Disputes

n Large number of BI suits have been filed against insurersw Most are still making their way through the court system…BUT

n Since mid-2020 numerous courts have made decisions favoring insurers across a growing number of industries (not just restaurants)

n Courts have generally found that:w Virus exclusions found in many policies are unambiguous and are binding

w That BI coverage is necessarily triggered only when there is actual physical loss or damage to property

w Government mandated closures alone are insufficient to trigger BI coverage

Workers Compensation

54 54

Some Pressure Points

Payroll Exposure Is Contracting RapidlyCOVID-19: Efforts to Expand

Presumption Continue

Workers Compensation & COVID-19

n Workers compensation written for COVID-19 exposed risks (e.g., hospitals, first responders, etc.) will likely see a spike in both severity and frequency

n Some states will require costs associated with precautionary quarantines of COVID-19 exposed workers

n Impact arising from “Essential Industries” unclear (e.g., grocery stores)

n Outside COVID-19 exposed segments—Large, Swift Drop in Payroll Exposurew Drop in WC payroll exposure base could be the fastest and largest in history

w Wage growth, which had been making gains, will also slow

w Overall likely net reduction in claim frequency

Workers Compensation & COVID-19

n At least 35 states have expanded or proposed expanding WC presumptions for COVID-19—including SC. Most restrict the assumption to “front-line” workers (e.g., health, 1st responders)

n Examples of presumption expansion beyond “front-line” workers: KY and ILw On April 10, KY extended WC presumption to day care, grocery store and postal

worker

w June 5, IL Gov. Pritzker signed HB 2455 for extended to a very large number of occupations, including:

w Individuals employed by grocery stores, pharmacies, convenience stores, food banks, media outlets, gas stations, banks, hardware stores, educational institutions, transportation providers, manufacturing facilities and restaurants, as long as individuals employed by essential businesses and operations are required by their employment to encounter members of the general public or to work in employment locations of more than 15 employees.

57

SUMMARYnThe P/C Insurance Industry Remains Strong, Stable, Sound

and Secure

nWC Has Avoided the Worst-Case COVID Scenario

nThe Rapid Economic Slowdown Will Temper P/C Growth, Especially in Economically Sensitive Lines (esp. WC)

nAsset Price Volatility Will Persist and Low Interest Rates Will Pressure Investment Earnings for Years

nCOVID-19 Exposures Are Substantial but Manageable with Headline Risk on BI and WC Issues

Thank you for your timeand your attention!

Twitter: twitter.com/bob_hartwigFor a copy of this presentation, email

me at robert.hartwig@moore.sc.edu or Download at www.uscriskcenter.com

58

mailto:robert.hartwig@moore.sc.eduhttp://www.uscriskcenter.com/